Theoretical Explanation of Chinas Outward Direct Investment.docx
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Theoretical Explanation of Chinas Outward Direct Investment.docx
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TheoreticalExplanationofChinasOutwardDirectInvestment
TheoreticalExplanationofChina’sOutwardDirectInvestment
href="#"> Abstract: Traditionalforeigndirectinvestment(FDI)theoryonlyexaminescorporateinvestmentmotivationwhileneglectinggovernmentroles.China’soutwarddirectinvestment(ODI)isofbothcommercialandstrategicsignificancetoleveragedomesticandinternationalresourcesandmarkets.ODIisacorporatebehaviorbutalsoisameansofachievingnationalstrategiesandheighteningpoliticalandeconomicstatuses.AsasourceofODI,ChinashouldprovidestrongguidanceandbackingtocorporateODIforbothcommercialandnationalinterests. KeyWords: ForeignDirectInvestment(FDI),nationalinterest,investmentsource,outwarddirectinvestment(ODI) I.ChineseODI: aNewPhenomenonforInternationalEconomics VladimirLeninnotedin1914thattheemergenceofcapitalexportisanimportantwatershedofmonopolisticcapitalism,asopposedtotheeraoflaissez-fairecapitalismcharacterizedbycommodityexport.Theexportofcapitalisameansforgreatpowerstodominateworldmarkets.InhisbookImperialismIstheHighestStageofCapitalism1,Leninnotedthatinthemonopolystage,surpluscapitalbecomesmorepronounced,andbankcapitalandindustrialcapitalbecomeintegrated.Nomatterinthecaseofproductioncapital(directinvestmentforestablishingenterprises)orloancapital(capitalexportintheformofloanswiththeconditiontopurchasethecreditor'scommoditiesusingpartoftheloans),“capitalexporthasbecomeameanstoencouragecommodityexport.”Somecreditorshaveusedcontractstocontroldebtor'sresourcesandsellcommoditiesathighpriceswhilepurchasingrawmaterialsatlowprices.BeforeWorldWarII,capitalexportwasprimarilyintheformofloancapital,andWesterneconomistsstudieditasaphenomenonofinternationalcurrencyflow.Internationaltradetheoryandexchangepremiumtheorybecamemainstreamtheoriesfortheexplanationofinternationalloancapital.ProposedbyGeorgeGoshenin1861,internationalloantheoryholdsthattheimportandexportofgoodsandservices,capitalexportandotherformsofinternationalbalanceofpaymentactivitiesbetweennationswillallgiverisetointernationalloans.Internationalloanswillchangeforeignexchangesupplyanddemand,andthuschangeforeignexchangerates.Inagivenperiodoftime,whenforeignincomeincreaseswhileforeignspendingdecreasesinacountry'sinternationalbalanceofpayments,foreigncreditswillexceedforeigndebts,whichmeanasurplusininternationalloans.Onthecontrary,ifforeigndebtsexceedforeigncredits,itsinternationalloanswillbeindeficit.Classicinternationalsecuritiesinvestmenttheoryholdsthattheveryexistenceofinternationalsecuritiesinvestmentisthedifferenceofexchangeratesbetweennations.Whenanation'sinterestrateislowerthananothernation's,financialcapitalwillflowfromthelowinterestratecountrytothehigherinterestratecountryuntilthegapisclosed. AfterWorldWarII,capitalexportbecamedominatedbydirectinvestmentwhichprimarilyoccurredbetweendevelopedcountries.AccordingtotheinterpretationanddefinitionoftheUnitedNationsConferenceonTradeandDevelopment(UNCTAD),fromacommercialperspective,thedifferencebetweendirectinvestmentandloancapital(indirectinvestment)isthatthelatteronlyaimsforcapitalreturns,whiletheformeraimsforbothcapitalreturnsandoperationrightsoroperationalcontrol.Thispromptedeconomiststoshifttheirresearchhorizon.Whymustforeignenterprisesacquireoperationalcontrolwheninvestinginahostcountry? Withoutcolonialprivileges,whatstrengthsdoforeignenterpriseshavetocompetewithlocalfirmstoachievecapitalreturns? Thesequestionstriggeredresponsesfromcontemporaryinternationaleconomistsonforeigndirectinvestment(FDI)theoryandmultinationalcompanies,aswellasastringoftheorieslikecorporatespecificadvantagetheory2,internalizationadvantagetheory3andinternationalproductioncompromisetheory4.TheseexplanationsandtheoriesformedthebasicframeworkforcontemporaryFDItheoryandareextensivelyreferencedinthetextbooksofWesterninternationaleconomics. Withoutadoubt,thesetheoriesweredevelopedtoexplainthecross-borderinvestmentofcompaniesinthemostdevelopedcapitalistindustrializednationsinEuropeandNorthAmerica.Thescopeofanalysisprimarilyappliedtothemutualinvestmentsbetweendevelopednations.Sincethe1960s,however,largecompaniesinsomelate-startingcapitalistcountriesandemergingindustrializedeconomiessuchasJapan,SouthKoreaandSingaporestartedtoinvestabroad,includingtolessdevelopedeconomies.Thischangedthecompositionofmultinationalcompanies.ComparedtolargecompaniesinEuropeandNorthAmerica,theircross-borderinvestmentsarenotmarkedwithclearcorporatespecificadvantagesorinternalizationadvantages.Thequestionishowtoexplaintheirinvestmentbehaviorsgivensuchweaknesses? Using“marginalindustrialrelocationtheory,”5JapanesescholarKiyoshiKojimaexplainedthe“flyinggeesepattern”formedintheprocessofindustrialrelocationinEastAsia,whichisactuallyadynamicextensionofcomparativeadvantagesandsharessimilarcharacteristicswithJohnH.Dunning'slocationtheory.TheseEasternandWesterntheoriesdominatedinternationaleconomicstextbooksforfortytofiftyyears. Afterthe1980s,economicliberalizationsweptacrosstheworld.Economicglobalizationadvancedwithgreaterspeed,internationaldirectinvestmentsbecamemorecomplex,andtheoriginofmultinationalfirmsbecamemorevaried.Inparalleltocontinuedmutualinvestmentsbetweendevelopedcountries,thereemergedlargeinvestmentflowsfromtheNorthtotheSouth,betweentheSouthandtheSouth,andeveninverselyfromtheSouthtotheNorth.Inthefaceofthesenewdevelopments,mainstreamtheoriesininternationaleconomicstextbooksbecamepuzzled.Corporateinvestmentfromdevelopingeconomiestoricheconomies,inparticular,madeexistingtheoriesimpotent.Amongtheoriesondirectinvestmentofdevelopingcountries,thesmall-scaletechnologytheoryofWells(1983)isregardedasapioneeringresearchoutcomeonmultinationalcompaniesfromthedevelopingworld.Accordingtosmall-scaletechnologytheory,thecomparativeadvantageofcompaniesindevelopingcountriescomesfromlowcosts,whichreflectsthemarketcharacteristicsofhomecountries.Suchlow-costadvantagescomefromthefollowingsources: possessionofsmall-scaleproductiontechnologiesforasmallmarket;nationalproductsthatarepopularabroad;alow-pricemarketingstrategy,etc.Giventhediverseandmulti-tieredworldmarket,evenforlessadvancedsmallfirms,theirlow-costadvantagestillpresentspowerfulcompetitiveness.Their“localcontentandspecialproducts”and“low-pricemarketingstrategy”makeitpossibleforthemtocompetewithmultinationalsfromdevelopedcountries.Accordingtosmall-scaletechnologytheory,evenenterprisesfromdevelopingcountrieswithsimpletechnology,alimitedbusinessscopeandasmallcapacitycanstilljoininternationalcompetitionthroughoutwarddirectinvestment(ODI). WithresearchonthecompetitivestrengthandinvestmentmotivesofIndianmultinationalcompanies,Lall(1983)developedhistechnologylocalizationtheoryonODIfromdevelopingcountries.Thistheoryholdsthatcorporatetechnologyformationindevelopingcountriescontainsinnovationactivitiesthatleadtospecificadvantages.Developingcountriesprovideadifferentenvironmentforcreatingtechnologyandknowledge.Theirtechnologiesareusuallylaborintensive,andtheirproductsareuniquetolocaldemandandthedemandofcountriesofequivalentincomelevels.Thatiswhydevelopingcountriesalsohavespecificadvantages.Technologylocalizationtheorystressesthatwhatdevelopingcountriesdoisnotsimplyduplicatetechnologiesfromdevelopedcountries;whattheydoistolearn,improveandinnovate.Itissuchinnovationthatbringsnewvitalityintointroducedtechnologies.Italsobringsnewcompetitiveadvantagestotheenterprisesandenablesthemtobecompetitiveinthelocalmarketandthemarketsofneighboringcountries.TheabovetwotheoriesexplainedODIfromdevelopingcountriesusingmicro-leveltheories,andexplainedwhatmakesitpossiblefordevelopingcountriestohavecomparativeadvantageswhiletakingpartininternationalproductionandbusinessactivities. Inthelate1980s,ProfessorMichaelE.PorterofHarvardBusinessSchoolproposedtheideaofan“internationalproductionvaluechain”inhiscross-borderbusinesstheory.This,tosomeextent,madeupforthedefectsofexistinginternationaldirectinvestmenttheories.Usingtheconceptof“valuechain,”Porter(1986)describedtheprocessthroughwhichmultinationalsdeveloptheirstrategiesandcompetitiveness.Specifically,twostrategicvariablesarecrucial: thefirstistheintegrationofcorporatebusinessactivitiesworldwide,i.e.whenorganizingbusinessactivitiesofvariouspartsofthevaluechain,multinationalcompaniesmustunderstandtheirworldwidelocations.Second,internalcoordination,i.e.whenconductingtheabove-mentionedbusinessactivities,multinationalcompaniesmustunderstandhowvariouslinksofthevaluechainarecoordinated.Porterholdsthatcompetitivenesscomesfromtwoaspects: firstisthevalueactivitiesthemselves,whicharefundamental.Theotherisvaluechainlinkage,whichmeanstherelationshipbetweenhowaval
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